Put another way, if the internal margin is greater than 42% (1/2.4), then the event is profitable. Trade Promotions can offer several benefits to businesses. Trade promotion remains the industry's biggest marketing line items, accounting for 46.2% of spending, according to about 100 manufacturer respondents. Over the next few weeks, we’ll be visiting these elements in detail. The right data in the hands of management can begin to measure the specific volume driven by specific trade promotions that yield profitable results. 40% of CPG trade promotion spending doesn’t drive the desired results — Nielsen Holdings. It is typically the second-largest line item on their P&Ls (behind the cost of goods sold), and it consumes about 20 percent of their … Clearly, our incremental units constitute total units minus the base: Remember, our incremental factor is comprised of the incremental units divided by the total units: The result is clear. Posted on December 21, 2017 July 24, 2019 by Karl Edmunds. hbspt.cta._relativeUrls=true;hbspt.cta.load(544043, '32689147-4b49-4725-b74f-cd747397e842', {}); hbspt.cta._relativeUrls=true;hbspt.cta.load(544043, '2e9efe59-608f-456c-b6ac-e0166e5624c7', {}); To summarize, we’ve outlined the more most useful metrics to collect in the trade promotion process, namely: The 4 Most Useful Metrics In CPG Trade Promotion | TABS Analytics, ©2021 - TABS Analytics All Rights Reserved |, Trade Promotion Management (or TPM), the day-to-day implementation of trade promotion practices, and, Trade Promotion Optimization (or TPO), which is the process of refining those practices. Trade promotion spending is typically the second largest cost line item after COGS for a FMCG company and according to a recent BCG study, trade … Trade Promotion Implementation (or TPI, formerly TPM), the standard day-to-day execution of promotion practices. Quality trade promotion analysis is impossible without the correct metrics. Before we get into specifics about correct metrics, let us first take a moment to clear up current thinking about trade promotion, and how we propose to revise it. The first actionable step toward change is for management to recognize the absolute need for more effective trade spending and be prepared to establish the right data-focused technology solution to track all programs, and support the planning and communication processes. However, implementing a trade promotion successfully requires a significant investment of time and money. Is an increase in market share worth it if you give away the majority of your margin to achieve it? We’re a technology-enabled analytics firm that’s been serving the consumer packaged goods industry since 1998. In this example, let’s say our base sales constitute 100 units per week. This is a downstream process. Trade spends accounts for up to 25 percent of gross sales for a CPG company, second only to the cost of goods sold. In our client relationships, we’ve seen various companies attempting to measure different aspects of their business, from retail dollars, to shipment dollars, to equivalized volume (rolls/sheets for paper, pounds for candy etc.). From TPM to AI-driven Business Intelligence, our trade spend solutions are easy to learn, quick to implement and simple to use so the benefits are seen quickly. Because not only is it possible, in today’s operating environment, it is essential to long term success. Trade promotion spending for a typical consumer brand can be 15 percent to 20 percent of sales revenue, depending upon the category. The final metric that’s vital to assess is your profit, which we will measure using Spend Ratio. The first question to confront is WHY? Each successive step builds on the one before it, and they are all critical for managing and optimizing your trade spending. If we need to equivalize later on to analyze certain things, then we do it later on. The four metrics you need are: Consumer Units, Revenue, The Incremental Factor and Spend Ratio. Other critical issues that are negatively impacting trade spending are forward buying by the retailers, off-invoice spending that isn’t tracked, inventory carrying costs, POS materials, promotional intervals, SKU proliferation by manufacturers, and the cost burden to manage all promotion activities. It has come from analyzing twenty-plus years’ worth of trade promotions, over 200,000 of them in all. Gather meaningful answers from integrated data sources quickly. You may have high confidence based on past results that sales will increase with promotional spending. Z. Trade promotions are an essential part of consumer-packaged goods (“CPG”) sales. The lack of consistency and visibility hurts: on average, 20 percent of CPG revenue is spent on trade promotion, yet more than half of that promotion spend results in a loss. But is it worth it? is a nationally recognized business leader and author with more than 20 years of experience working with suppliers, distributors, and retailers in the CPG industry. This site uses Akismet to reduce spam. Later on, we'll also dive into the world of data harmonization, where you’ll learn to improve the accuracy of results by standardizing on core units of measurement and integrating different sources of information. This set of best practice information is unique in the consumer packaged goods (CPG) industry. Consider: manufacturers know what they spend on trade promotion. 2020: CPG Trends . Buyer, I need to generate $x for every dollar I spend, and the current deal structure isn’t doing that. This type of decision framework also enables more fact-based communication and planning among all parties to the supply chain including manufacturer, distributor, broker and retailer. It’s lost entirely, and we will address that question in more detail in later blog posts. When sitting down with new clients, TABS guides them through the six essential elements of managing trade promotion. Let’s calculate our total units. At 10-20% of gross sales, trade funds are a big investment for most manufacturers. Essentially, trade spending is the amount a company spends to increase demand for its products, including coupons, preferential shelf display locations (slotting) and co … Promotions can range from trying to boost awareness of a product, to taking advantage of times when a given product may be in high demand, to unloading inventory before it is no longer usable. Many CPG manufacturers start to hyperventilate at the thought of losing market share or sales if their trade spending is stopped or changed. Trade Promotion refers to marketing activities that are executed in retail between these two partners. The company offers TPE (trade promotion effectiveness) Community, an online platform that brings like-minded CPGs together to help address common trade issues; a SaaS TPM product to help plan, control, and analyze trade promotion spending; and trade promotion activation services to help users with analysis, planning, and TPM solution administration support. For more information on cookies, please click here. For now you can review the actual academic research that proves the incrementality of these sales here.). If you can help me get to that objective by shaving some of your margin I can go back and get more money from my management.”. The holidays represent a major source of revenue for almost every CPG manufacturer and the season is quickly approaching. Some of this spending is given automatically as off-invoice allowances. Stunningly, 59 percent lost money (in the United States, it’s 72 percent). 203 Colonial Drive It also strengthens the trade decisions made among internal operations, marketing, and sales functions. Manufacturers of consumer packaged goods (CPG) can transform their sales systems to drive profitable growth—often adding 10 to 15 percent to the bottom line operating results on an ongoing basis—through improved trade promotion efficiency.Technology facilitates in optimizing trade promotions not just with features to inform, but also to analyze. Trade Promotion Measurement (the “new” TPM, if you will) is the periodic testing of those practices, and figuring out what works vs. what doesn’t. Despite growing trade promotion budgets, many companies simply anniversary the prior year’s trade spending practices without identifying ways to optimize these initiatives. Presently, the conventional wisdom in the CPG industry separates trade promotion practices into two distinct branches: We propose that splitting TPO actions into four different tiers is a more effective and comprehensible approach. Most CPG firms struggle to track, measure, and confirm whether the spending produced positive, incremental results. You’ll recall that our total incremental units were 1,050. For example, ECR (Efficient Consumer Response) was an informal program implemented to identify and eliminate inefficiencies in the supply chain and drive those inefficiencies out of the system. In Europe, where we’re experiencing a broadly deflationary environment, decent returns on trade promotion spend are increasingly hard to generate. Many also experience difficulty keeping up with large … How do you measure the value of that customer if you had to give most of your margin to get a one-time purchase knowing they will chase the next discount regardless of the brand? In addition to simplicity, this measure also has the benefit of being able to be shared with retailers because no sensitive internal costing information is being revealed. In this environment, trade planning optimization remains a theoretical exercise. Trade Promotion is a marketing technique aimed at increasing demand for products in retail stores based on special pricing, display fixtures, demonstrations, value-added bonuses, no-obligation gifts, and more. In short, Incremental Factor is the simplest way to tell just how dependent your business is on promotion. We’ll come back to Revenue in just a few moments, but first, let’s talk about another important metric, the Incremental Factor. In a sense, CPG companies are just beginning to thaw out after the storm called the Great Recession. Most importantly, after driving up sales with various trade spending programs, can you measure or track new customer retention and brand loyalty over time? As an example, let’s say that the total cost of three events is $1,500. Each successive step builds on the one before it, and they are all critical for managing and optimizing your trade spending. Trade Promotion Optimization (TPO), where we work to create an optimization model, and actually automate those new processes as best we can. When you look at all aspects of the trade spend issue, the most important missing factor is getting real time information related to all trade spend activities so changes can be made and measurable results can be viewed and tracked. Consumer packaged goods companies spend billions annually on trade promotion, and pressure from retailers, competitors, and consumers is increasing. 2 Corporate Drive, Suite 254 Shelton, CT 06484 (203) 925-9162 info@tabsanalytics.com. By continuing to visit our site without changing your settings, you are accepting our use of cookies. COUPON (6 days ago) Most CPG firms struggle to track, measure, and confirm whether the spending produced positive, incremental results. The average consumer packaged goods (CPG) company allocates 14% of its total revenue to trade promotion activities 1, which underlines the importance of these programs. We have also seen CPG companies fail to hold adequate reserves to deal with deductions accruing from the prior year. We then take that unit count and create a measurement called Revenue. F: +1 607-739-4045 As an example, if the net cost was $3.50, and we sold 600 units, our Revenue would be $2,100 (3.50 x 600). Focusing on topics from pricing analysis and slotting tactics to spending priorities and retailer performance, this research represents responses from 235 CPG companies across 110 store categories and 55 retailers. CPGToolBox Is Transforming How Consumer Goods Manage Trade Spend with a Complete TPx Solution Suite. So, here’s the equation: $3,675 (IR) / $1,500 (IS) = 2.4 Spend Ratio. The importance of having a well thought out trade promotion architecture cannot be overstated. CPG Trade Spending & Promotions:  Ignorance is NOT Acceptable, Vice President, Salient Management Company. This not Revenue in the way it is typically used, which is total Net Sales shipped. A report by Nielsen Holdings confirms that 40% of CPG trade promotion spending doesn’t drive the desired results while 59% of trade promotions globally don’t break even. Correct Metrics; Correct Measurement; Correct Data Harmonization; Tactics; Planning ; Execution; This set of best practice information is unique in the consumer packaged goods (CPG) industry. But how are they to determine what they make on it? Our break-even Spend Ratio (SR) is the reciprocal of your internal Margin Percentage per unit (1/m). Home » Blog » CPG Trade Spending & Promotions:  Ignorance is NOT Acceptable. The study evaluated spending activity across the five core components of the modern CPG marketing mix: trade, advertising, consumer promotion, shopper marketing and digital. of trade promotions globally don’t break even – Nielsen Holdings. The key to keeping measurement simple and accurate is to measure exclusively in Consumer Units. Consumer-packaged-goods (CPG) companies worldwide invest about 20 percent of their revenue annually in trade promotions. This is going to serve as the foundation of how we evaluate our incremental (promotional) sales vs. our base sales. What differentiates best-in-class CPG players from average ones is the structure underpinning this variation. Spend more than a few minutes in a conversation with someone in the CPG (consumer packaged goods) industry and you will almost inevitably find yourself discussing the spiraling cost of trade promotion. Streamline the settlements process and improve speed to cash. With the right technology solution as a foundation, profitable and sustainable growth is achievable. If you start by measuring the wrong things, all analysis falls apart. Trade spending is a common practice amongst consumer-packaged goods (CPG) and retail companies. Its solutions include RapidDraft that … (Note:  this statement leads to many readers likely saying, “How do we know it goes away entirely? hbspt.cta._relativeUrls=true;hbspt.cta.load(544043, '63281776-e31a-43b8-9d94-a5af7324ccc8', {}); TABS Analytics gives you a competitive advantage by simplifying the way you deal with your CPG data and giving you the power to easily extract competitive insights. How to Make Trade Spending Drive Enterprise Value and Profitable Growth. In addition to cutting the costs associated with promotions, retailers and CPG companies must adjust prices faster than ever to keep up with an ever-changing global market. And even companies that don’t have direct-to-consumer marketing will still often have retailer driven in-store merchandising. Dr. Kurt Jetta, CEO and founder of the TABS Analytics, has refined this process over a period of many years, in his comprehensive study of trade promotion of packaged goods companies in nearly every category and mass market retailer. Your email address will not be published. This approach ensures profitable promotions are repeated and waste is eliminated. Z. Rather our Revenue definition is the shipment value of the consumer units sold at retail. Only marginal success was achieved. This can be done for a single event or any aggregated period, such as a quarter or year. Because this storm has significantly altered the landscape – especially when it comes to trade promotions. Won’t it just be made up on other brands or in future weeks?”  The answer is no. To truly achieve effectiveness in trade spending, management needs to be able to see real market transaction level results by store. It can be easily communicated: “Look Mr./Ms. Required fields are marked *. Another key hindrance to effective management of trade spending is aggregating or summarizing various trade spend initiatives to a point that managers can’t clearly identify the effectiveness of a trade event by account type, channel, display activities at store level, or even down to the shelf set. Let’s look at pasta sauce as an example. Traditional trade promotion optimization (TPO) solutions are scenario-based and trade promotion management (TPM) tools take into account transactional activity, but the two improve promotion effectiveness within a single retailer alone. This allows rapid identification of key spending programs that are not driving positive results and the ability to track the outcomes of any changes made in trade activities. In other words, their trade promotions architecture. Obviously, the tactical side remains: But then we have the following four steps encompassing optimization: This is an iterative process, where we’re constantly executing, measuring results, refining practices, automating them, and on and on. Notify me of follow-up comments by email. Your email address will not be published. E: info@salient.com. In a world where CPG companies have weathered unparalleled transformation in a very short period of time, and where competitive pressures are at their most intense, adjusting trade spending and creating any vulnerability at retail is not a lever to be pulled. Consumer packaged goods (CPG) and retail companies have invested heavily in technology solutions to boost their trade promotion performance, but many lack the talent or business processes to capitalize on these investments. Even Prego, the brand with the lowest Incremental Factor of the top five brands, still depends on incremental sales for nearly half of their business.